Sam Fletcher
OGJ Senior Writer
HOUSTON, Nov. 4 -- The front-month crude contract climbed 0.9% Nov. 3 in the New York market on a government report of a larger-than-expected drop in US oil inventories and the anticipated Federal Reserve Bank decision to pump more “quantitative easing” (QE) funds into the US economy, while the front-month natural gas price dropped 0.9%.
The broader markets rallied after Federal Reserve Chairman Ben Bernanke announced a plan to buy $600 billion of Treasuries of the next 8 months, providing banks with more cash to lend to businesses in hopes of stimulating the US economy. The plan also triggered a sharp drop in the value of the US dollar in volatile trading.
Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “The dollar’s 0.7% decline against the euro on Fed’s asset purchase announcement also lent support to prices. After the [second] QE gets priced into the currency markets, crude will once again look towards the fundamentals of the physical demand which still remains weak and would likely weigh on prices.”
‘Liquidity not needed’
Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The Fed delivered about what was expected and in the end will add in $75 billion of fresh printed bills to the $35 billion of reinvestments from its mortgage-backed securities. Altogether we are moving from the $20-30 billion of permanent open market operations (POMOs) that were restarted in mid-August to $110 billion of POMO operations by month until the end of June. This will be about two times more by month than what the Fed was doing in the second quarter of 2009.”
Jakob continued, “It comes, however, at a time when markets are not asking for additional liquidity and when US assets seem relatively well priced. The Fed has still $11 billion of POMO under its current program (one POMO today, one POMO Nov. 8) and will then announce the schedule for the new plan on Nov. 10. Given that markets are not in a disrupted state that requires the liquidity given by the Fed, the next question that will quickly arise is what happens at the end of June?”
He said, “The Fed wants to promote employment but as an employer we would want to know what happens when the current program ends. As a passive investor that understands that the Fed wants to promote the Standard & Poor’s Index moving back to the 2007 highs, we would want to know what happens to the stock market once the Fed stops buying it (indirectly of course, through the primary dealers).” Data shows “after a 2-week slowdown the equity mutual funds are suffering again from outflows,” he said.
“Given that the Fed is making trading a pure liquidity game, we would expect to see greater trading of the indices per se (i.e. the S&P Index rather than any of its individual components), which will then not necessarily reduce the amount of outflows from mutual funds but which in the end could become a liquidity issue for the index-components arbitrageurs,” Jakob said. The liquidity injection not wanted by US markets “will have to go somewhere else and the next steps to watch are therefore the intervention of the Bank of Japan and capital controls from emerging countries,” he said.
The Energy Information Administration reported Nov. 4 the injection of 67 bcf of natural gas into US underground storage in the week ended Oct. 29. That put working gas in storage above 3.8 tcf—up 37 bcf from the comparable period last year and 353 bcf above the 5-year average. The Wall Street consensus was for an injection of 65 bcf. Sharma said, “We believe that with the heating demand still marginal, storage is heading to set a new all-time high record by the next week itself.”
EIA earlier reported commercial US crude inventories increased 2 million bbl to 368.2 million bbl in the same week, surpassing the Wall Street consensus for a 1.5 million bbl gain. On the other hand, gasoline stocks fell 2.7 million bbl to 212.3 million bbl in the same week although the market anticipated virtually no change. Both finished gasoline inventories and blending components inventories decreased last week. Distillate fuel inventories dropped 3.6 million bbl to 141.7 million bbl, well past the 1 million bbl decline analysts were expecting (OGJ Online, Nov. 3, 2010).
Jacques Rousseau, managing director of equity research, RBC Capital Markets, Reston, Va., said, ‘The EIA weekly data have shown that despite weaker demand week-over-week for light products (gasoline, distillate, and jet fuel), stocks have fallen due to lower gasoline and distillate production levels during the end of the refinery maintenance season. Gasoline consumption for the week is unchanged from the comparable week from last year.”
Rousseau expects rising US refinery production in November and December to further increase gasoline and distillate inventories, which are already high, and to push down refining margins and refiner stock prices through the rest of this year.
He said, “Over the past 4 weeks, total product demand is 0.3% ahead of year-ago levels, according to the EIA (vs. down 0.3% last week). Gasoline inventories are 6% ahead of their 5-year average for this calendar week while distillate stocks are 19% ahead of their 5-year mean.” Rousseau estimates the average US refining margin decreased to $7/bbl from $8/bbl over the past week vs. an average $12/bbl in 2008 and $9/bbl in 2009. He estimates the West Texas Intermediate-Maya crude differential averaged $9/bbl last week, in line with the year-to-date average, vs. averages of $5/bbl in 2009 and $16/bbl in 2008.
Energy prices
The December and January contracts for benchmark US sweet, light crudes dropped 79¢ each on Nov. 3 to $84.69/bbl and $85.35/bbl, respectively, on the New York Mercantile Exchange. On the US spot market, WTI at Cushing, Okla., was up $1.74 to $84.69/bbl. Heating oil for December delivery advanced 3.43¢ to $2.33/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month increased 2.84¢ to $2.14/gal.
The December natural gas contract dropped 3.4¢ to $3.84/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., jumped 10.2¢ to $3.38/MMbtu.
In London, the December IPE contract for North Sea Brent crude was up 97¢ to $86.38/bbl, still at a premium to WTI. Gas oil for November gained $6 to $722.25/tonne.
The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes increased 66¢ to $82.56/bbl.
Contact Sam Fletcher at [email protected].
